ACCOUNTING CONCEPTS
• Any changes should be highlighted and their impact
Business Entity
• The affairs of the business are kept separate from
those of the owners.
Historical Cost
• Transactions are recorded at their cost to the
business.
• Requires that assets appear in the balance sheet at
their original cost, less any depreciation to date.
• It is assumed that the purchasing power of money will
remain unchanged.
Money Measurement
• Accounting statements restrict themselves to matters
which can be measured objectively in money terms.
• Items such as the values of the company's customer
base and its work force are excluded.
Dual Aspect (Duality)
• The double entry system requires all transactions to
have two entries, one on the debit of an account and one on
the credit of the same or a different account.
• It enables balance to be maintained in the accounting
equation.
Periodicity (Time Interval)
• It requires that a balance sheet and profit and loss
account should be produced at regular intervals.
• Most businesses produce annual accounts and the
Companies Acts require annual accounts for companies.
• Public companies produce half yearly interim
accounts and many businesses produce monthly or quarterly
accounts for internal purposes.
Going Concern
• It is assumed that a business will continue indefinitely
in its present form.
• If a business is not a going concern, its assets should
be valued in the balance sheet at the amounts they could be
expected to fetch in an enforced sale.
Consistency
• Transactions of a similar nature should be recorded in
the same way in the same accounting period and in all future
accounting periods.
• The figures published by the company should be
comparable from one year to the next.
• Accounting policies should not be changed from one
year to the next unless there is a very good reason for doing
so.
explained
Prudence
• Revenue and profits are not anticipated but are
recognised by inclusion in the profit and loss account only
when realised in the form of cash or other assets; the ultimate
cash realisation of which can be assessed with reasonable
certainty. Profit or any asset should be stated at the lowest
reasonable figure.
• Provision is made for all known liabilities (expenses
and losses) whether the amount is known with certainty or is a
best estimate in the light of information available. Any liability
should be stated at the highest reasonable figure.
Realisation
• States that income is recognised as and when it is
“earned”.
• Transactions are realised when cash or a debtor
replace goods or services.
• Goods sent on a sale or return basis is treated as
forming part of stock until the customer accepts the goods.
Accruals (Matching)
• Expenses are recognised as and when they are
incurred, regardless of whether or not the amount has been
paid.
• Costs are matched with related income.
• Where costs have been incurred and there is no
related income in the period or in future periods, with which the
costs can be matched, they are treated as an expense of the
accounting period.
Materiality
• There is little point in providing information which is so
detailed as to be unintelligible.
• The statements can be made clearer by showing
totals such as “administrative expenses” instead of listing every
item which makes up this heading.
• An amount may be considered material in the
accounts if its inclusion in, or omission from, the accounts
would affect the way people read and interpret those financial
statements.
Substance Over Form
• Some transactions have a legal form which is different
from the underlying commercial reality or substance. In such
cases, for accounting purposes, the substance is preferred to
the form.
• Hire purchase transactions. The legal form that the
'buyer' of an asset under a hire purchase transaction, hires the
asset until the final payment when the ownership is transferred
to him. The substance of the transaction is that the asset is
acquired by the 'buyer' and that he has a loan to assist him in
the purchase which he repays over a period of time together
with interest.
• Goods sold subject to reservation of title. The
legal form of these transactions is that goods are sold with the
agreement that ownership of the goods does not pass from the
vendor to the buyer until payment is made. The substance of
the transactions is that they are normal credit sales with the
reservation of title clause in the contract for sale being of
importance only if the buyer becomes insolvent.